Increased global co-operation between financial regulators

By Rebecca Copley and Veronique Marquis

DUBAI 21 October 2017: Financial institutions have, for some time, operated as global rather than local businesses. It is therefore not surprising that regulators of the major international financial centres are continuing to strengthen the manner in which they co-operate with each other.

Apart from the traditional focus on market supervision and enforcement activities, the continued evolution of Fintech applications has also prompted stronger ties among the regulators.

The recent developments in Hong Kong are a great example of the increasing emphasis placed on regulatory cooperation as in 2017 alone, we saw the Securities and Futures Commission (“SFC”) enter into five co-operation agreements and memoranda of understanding with its counterparts across the globe .

In January and July 2017, it entered into two memoranda of understanding with the USA’s Securities and Exchange Commission and the UK’s Financial Conduct Authority (“FCA”) respectively on the supervision of regulated entities that operate on a cross-border basis. These memoranda established a formal framework to facilitate mutual consultation, exchange of information and cross-border on-site visits.

They envisage broad co-operation, from the initial application for regulatory approval from new market applicants to specific supervisory action taken by the regulators against established institutions.

From May to August 2017, the SFC then entered into three co-operation agreements with the FCA, the Australian Securities & Investments Commission and the Dubai Financial Services Authority (“DFSA”) on the development and promotion of FinTech. Whilst these are not entirely new relationships, (the SEC for example having entered into a Memorandum of Understanding with the DFSA as far back as 2008), this recent round of activity demonstrates the fact that the regulators are becoming increasingly global in their approach to regulation.

Understanding the implications of this change in outlook is of critical importance to financial institutions if they are to both benefit from the opportunities that this creates and effectively manage their regulatory risk.

For instance, in its latest set of agreements, the SEC provided for a referral mechanism, under which the regulator of one jurisdiction may refer an innovative financial business to the regulator of another jurisdiction to assist the business’ understanding of the regime in that other jurisdiction, and how such regime is relevant to them.

This approach helps foster a culture of innovation and has the potential to unlock business opportunities that would otherwise not exist. Equally however, it also demonstrates the need to consider the global regulatory landscape when developing new products and services as well as jurisdiction specific developments.

The increasing number of cooperation agreements arising out of this new era of global cooperation is however only a part of the picture. Regulators have for some years now been cooperating on a much greater level, particularly those tasked with stamping out bribery and corruption in the context of enforcement.

For example, this year saw the results of investigations undertaken by authorities in the US, Brazil and Switzerland into allegations against Odebrecht (Brazil’s largest construction firm). The authorities worked together over three years, investigating allegations of bribery across 12 jurisdictions in respect of over 100 projects resulting in a fine of $2.6bn.

There is no doubt that the ability to investigate and take appropriate action was made easier by the global sharing of information and resource. This is a trend that is only set continue amongst all regulators, including those in the financial services sector.

Keeping abreast of global regulatory change is therefore of critical importance and developing an international best practice standard to risk management will help minimise risk in this ever evolving landscape.

Note: The authors are Rebecca Copley, Partner and Head of Financial Services Disputes & Investigations – Middle East, and Veronique Marquis, Partner, Financial Services Disputes and Investigations, with global law firm Eversheds Sutherland.